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POLITICO CHAT: Payroll fight

POLITICO 44

It’s highly unlikely Republicans would offer the tax credit proposal as an alternative this week to Majority Leader Harry Reid’s revised payroll tax-cut extension plan. But the idea has been batted around in hallway discussions and closed-door meetings this week as they try to fend off a barrage of attacks from President Barack Obama and shore up divisions in their conference over the payroll tax cut.

Rival Democratic and Republican payroll tax holiday plans failed in the Senate last week over GOP objections that it raids money from the Social Security Trust Fund. Republicans also opposed the Democratic plan because it was paid for with a permanent surtax on millionaires.

The income tax credit would provide an extra $120 billion to $150 billion next year for families making under $200,000 — roughly the same dollar amount as the payroll tax cut, which amounts to about $1,000 for the average family, said senators familiar with the plan. The credit would come out of the general fund as opposed to the Social Security fund.

“I think that is a smart idea. It’s a way to provide tax relief without raiding the Social Security trust fund. That appeals to me too because I’ve been trying for years to fix Social Security,” Sen. Lindsey Graham (R-S.C.) told POLITICO. “The problem with the payroll tax holiday is it’s coming out of Social Security, so you shouldn’t be robbing seniors to pay for tax cuts that can be done with a tax credit.”

Sen. Richard Burr (R-N.C.) has spoken in favor of the tax credit, senators said. And Sens. Pat Toomey (R-Pa.) and Rob Portman (R-Ohio) also were also reported by senators on Wednesday to be on board. But on Thursday, spokesmen for Toomey and Portman said they were not involved in the discussions.

Their participation would have been significant since both served on the deficit-cutting supercommittee, and the tax credit was part of the panel’s negotiations to reform the Tax Code.

“Of the two, [the income tax credit] would be the better thing to do. It’s cleaner,” Sen. Roy Blunt (R-Mo.) told POLITICO. “I don’t know that I’d vote for it, but I think it’s the better of the two solutions.”

Added fellow freshman Sen. Kelly Ayotte (R-N.H.): “I’m open minded to it. I want to look at it and see what the proposal is.”

Sen. John Cornyn of Texas, a member of Minority Leader Mitch McConnell’s leadership team, confirmed the tax credit was “one of the alternatives being floated.” But he said Senate Republicans were still waiting for House Republicans next week to pass and send over a tax-extender package that would address a number of expiring provisions, including the payroll tax cut.

So what do Republicans plan to offer this week alongside Reid’s latest payroll tax cut plan, which scales back the millionaires tax and makes it temporary? A proposal not much different than the GOP alternative McConnell put forth last week, several senators said.

“This week is all political show. Everybody knows nothing is going to pass this week, so this is all a waste of time and total political theater,” Sen. Bob Corker (R-Tenn.) told POLITICO. “Next week is when the payroll tax will be dealt with.”

And Corker remains doubtful the income tax credit idea will stick with his caucus.

“I think all temporary measures all end up in the same place,” he said, “and that is, not affecting anything.”

The plan offered by the Democrats does NOT raid the Social Security Trust Fund. The fund would be replenished from the general fund, just like the Republican tax credit plan.

So when the article says:

"Rival Democratic and Republican payroll tax holiday plans failed in the Senate last week over GOP objections that it raids money from the Social Security Trust Fund. Republicans also opposed the Democratic plan because it was paid for with a permanent surtax on millionaires."

It really should say, "Rival Democratic and Republican payroll tax holiday plans failed in the Senate last week over GOP objections that it was paid for with a permanent surtax on millionaires."

Protecting the rich is the only thing they really care about. Of course Republicans could just agree to pass the extension without offsets. After all, their philosophy is that tax cuts don't have to be paid for...or is that only high-end tax cuts?

The income tax credit would provide an extra $120 billion to $150 billion next year for families making under $200,000 — roughly the same dollar amount as the payroll tax cut, which amounts to about $1,000 for the average family, said senators familiar with the plan. The credit would come out of the general fund as opposed to the Social Security fund.

The end result would be the same --- more borrowing and thus a higher deficit.

With an extension/expansion of the SS tax break for another year, Treasury will be forced to borrow money to cover the additional IOUs it will withdraw from the so-called SS "trust fund". Just like is happening this year, every dollar of SS revenue needed from the "trust fund" to cover current SS benefits REQUIRES the Treasury to find the actual money elsewhere -- and in these days of huge deficits, the only place to get that money is by issuing new public debt.

Should the GOP plan be passed instead, all that happens is that whatever the "value" of the tax cut provided, those revenues will have to be replaced by additional borrowing -- unless Congress also cuts other spending somewhere else.

In either case -- the macro-economic benefit of yet another temporary tax break will be minor, since research has shown that most people use these temporary breaks to either pay down debt or save for future expenses --- they generally DO NOT use the little bit of extra money to spend on anything they already are not spending it on.

ENOUGH IS ENOUGH! I am leaving this Republican party. It is not even close to where it used to be. If Obama offered a solution to Cancer, the Republicans we have now would fight it because it increased world population. They care NOTHING of the needs of the lower and middle income people. THIS IS NOT what we used to stand for!

If you all hate Obama and wish him political harm. . .fine and good. I understand that. But, to fight EVERY DAMNED THING Just because it did not come from our caucus is putting people's lives at risk, not to mention their property and livlihoods.

Protecting the rich is the only thing they really care about. Of course Republicans could just agree to pass the extension without offsets. After all, their philosophy is that tax cuts don't have to be paid for...or is that only high-end tax cuts?

The plan offered by the Democrats does NOT raid the Social Security Trust Fund. The fund would be replenished from the general fund, just like the Republican tax credit plan.

There is NOTHING in the SS Trust Fund to raid.

All it contains are IOUs [non-marketable special "bonds"] placed there dollar for dollar for every excess SS dollar taken in not needed for current benefits in the year collected. This has been the case since SS was founded.

Reducing current SS revenues forces the Treasury to access those trust fund IOUs more because it increases the amount of SS revenues short of what is needed to pay current benefits [about $48B estimated for 2011] -- and in doing so, forces Treasury to borrow additional money by issuing new public debt in order to "cover" those IOUs.

The Democrat Plan results in additional Treasury borrowing to cover SS benefits not being covered by current SS revenues that have been significantly reduced by the "tax holiday".

The GOP Plan results in additional Treasury borrowing to cover the loss of the general tax revenue now not coming in due to the tax break.

The whole idea of this temporary tax break, however implemented, is based on the fallacy that doing so provides a significant economic "kick". Research has shown that these type of breaks do NOT do what its advocates say it does [see two studies by Joel Slemrod and Mathew Shapiro of Univ of Mich who studied both the 2008 Bush tax rebate and then the Obama Stimulus "making work pay" tax break. In both cases, they found that generally taxpayers did not spend the new money -- for the 2008 tax break, only about 25% spent it; and for the Obama tax break, only 13% spent it. The rest either used it to pay down debt or to save for future expenses.]

The tax credit makes complete sense. Why should Social Security recipients suffer a death blow to the SS trust fund if the same relief can be provided by a tax credit which can more easily be offset by cuts to programs or increases on millionaire's taxes. Absent raids on the trust fund Social Security is not an urgent problem. If the Treasury were paying a fair rate of return on the trust fund (given the drop in credit rating of the Treasury) then Social Security would be good for even longer.

I find it amazing (actually I mean sickening) that a tax cut supported by Democrats, and most heavily benefiting the typical working stiffs needs to be paid for by cuts to spending, or matching revenues from any source not spelled the "one-percenters" according to the twisted logic of the GOP.

The payroll tax has been sent to the General Funds since Johnson raided it and Social Security is paid out of General Funds.

This well worn story is NOT true.

What LBJ did was to cause the SS revenues to be counted alongside the "general revenues" when the overall budget numbers were reported. This is referred to as the "unified budget". He did this because SS at the time generated small surpluses, thus by combining the SS budget REPORTING with general budget REPORTING, he made it look like his budget numbers were better than they were. It was an accounting trick...nothing more.

In point of fact, excess revenues from SS taxes have ALWAYS been provided to the Treasury, and nothing has ever been put into the "trust fund" over the years except debt instruments.

SS revenues again went "off budget" in 1985. You can read Social Security's explanation for what happened here:

The Treasury buys Treasury Bonds each year ...and ...as they come due they pay for Social Security out of those funds.

This is technically true -- but understand that to "cash" those bonds, Treausry has to find the money from somewhere. They have 3 potential sources: excess general tax revenues [only possible in surplus times]; by taking money to be spent on something else and spending it on cashing the IOU [cutting spending elsewhere]; or issuing new public debt [actual "marketable" bonds to the general public]. The third option is what is being chosen since SS revenues to pay benefits went negative this year.

However......Social Security needs to be REFORMED.

A truer statement could not be uttered about SS. When you come to understand that the "trust fund" contains NO ASSETS, and that using trust fund IOUs REQUIRES the Treasury to find the actual money elsewhere, any notion that SS is not close to fiscal crisis NOW becomes obvious [or should].

The SS "tax holiday" is merely accelerating a problem that too many still refuse to acknowledge or understand.

We all know we are borrowing whatever money that doesn't get collected via tax cuts, PLUS 40%.

Most thinking people know that revenues (taxes) will have to be raised to cover debt service, at least.

All but the most die-hard Keynesians and Communists can see that "stimulus" is not effective under the current world conditions.

Yet, we can't discuss budget freezes, actual budget cuts, or heaven forbid even just forgoing baseline increases. I wouldn't be opposed to paying more taxes out of my middle-class income if I knew that spending could even just "allegedly" be under control.